MARKET ANALYSIS WITH RATIONAL EXPECTATIONS: THEORY AND ESTIMATION

This paper presents an approach for analysis and estimation of dynamic market structures with rational expectations. Certainty equivalence is maintained and aggregate behavior represented by linear equations with some expected prices as arguments. Conditions imposed by the market structure are solved for an equilibrium, fixed point, price sequence. In this framework prices, current and expected, are linear functions of exogenous values and elements of a state vector. The structure poses an interesting estimation problem and suggests effective estimation procedures. Results for an application to the broiler chicken market using three years of weekly data are discussed.